February 2012

February 24, 2011

Wal-Mart: Flying Blind With Missing Instruments

Suppose you find out that the aircraft that you are about to step into for a night flight is missing the instrument that would tell the pilot how high the plane is? Suppose you know that the air traffic controller is equally lacking access to any information about the altitude of the planes it is controlling? Will you step in to that aircraft? You won't.

Furthermore, if that were to be the situation with aircraft generally, would you be surprised to find that planes were repeatedly flying into each other or crashing into mountains? No, you wouldn't. That's the because the planes and the air traffic controllers would be missing the most critical piece of information to navigate the plane. The situation would be intolerable. Something would have to be done about it.

The missing information in the business world

Ironically, by analogy, that's roughly the situation we find ourselves in the business world. The instrument that would give us the most critical piece of information about the health of the organization is missing. As a result, the top management is flying blind. It really has no idea of where their organization is heading. Because they don't have this information themselves, they can't report on it to the public. As a result, it's missing from most of the discussions in the business press. Consequently, should we be surprised at how often firms are said to be doing well and then suddenly crash and burn? And yet not very much is being done about it.

The new bottom line of business

As Roger Martin, Dean of the Rotman School of Management at the University of Toronto, pointed out in his classic HBR article[i], we live now in the age of customer capitalism. The era of shareholder capitalism, i.e. pushing products and services at customers, of tweaking the supply chain, of parsing and manufacturing demand, with the goal of making money of shareholders, is over. The customer is in charge, as a result of epochal shift of power in the marketplace from seller to buyer. Making money and corporate survival now depend not merely on satisfying customers but delighting them. To prosper, firms must offer a continuing supply of new value and deliver it sooner. The new bottom line of business is: is the customer delighted?

Yet information about the business's new bottom line is precisely what is missing in what managers focus on, what they report to the public and consequently what the business press talks about. The talk is about everything except that. This is because the managers are still living and thinking in the past era of shareholder capitalism.

The talk is about outputs, rather than outcomes, as Umair Haque would say in his wonderful book, : The New Capitalist Manifesto. They are still talking about the world of push, as John Hagel, John Seely Brown and Lang Davison say in their fine book, The Power of Pull. They are still thinking in terms of inside-out, rather than outside-in, as Ranjay Gulati says in his excellent book, Reorganize for Resilience. In short, they are talking about in a world that for practical purposes no longer exists.

The case of Wal-Mart

Let's stick with Wal-Mart [WMT] for a bit. I explained in my blog yesterday why Wal-Mart's business model is broken and also how it can be fixed. Wal-Mart thrived so long as it was the cheapest: now that it's no longer the cheapest, its only hope of survival is finding new ways to delight its customers.

Yet the CEO, Mike Duke, gives no indication of realizing that this is what he should be focusing on. Instead, he is focusing on "pricing and merchandising." To continue with the airline analogy, it's as though the pilot is down in the engine room of the plane, fiddling with the valves, while no one is watching where the plane is heading.

As a result, he supplies no information about whether customers are being delighted and if not, what is being done about it.

Excellent writers like John Jannarone in the Wall Street Journal are therefore forced to make inferences. In this case, the inferences are stunningly easy to make. Wal-Mart's game plan has been to sell goods at the lowest price. Wal-Mart is no longer offering the lowest prices. Ergo, customers are hardly likely to be delighted.

What is missing is hard data on customer delight. That's what will tell us precisely where Wal-Mart stands now. The change in the numbers over time will tell us whether Wal-Mart is heading for a crash or whether it might survive.

The numbers that Wal-Mart does offer, such as store sales or profits, don't yield good information, because they are so easily manipulated. Wal-Mart may be able to pump up its sales numbers by offering costly discounts, or worse, finding ways to nickel and dime customers with hidden charges. Those devices can pump up the financial numbers while disgusting the very customers who need to be delighted if Wal-Mart is to survive. As a result, the more numbers are pumped up, the dimmer Wal-Mart's prospects of survival may become.

Measuring outcomes: customer delight

Traditional management was wrong about many things, but they were right about one thing: the importance of measurement. They said, correctly, that you can only manage what you measure.

The trouble was that they were measuring the wrong thing. They were measuring outputs, rather than outcomes. They were counting beans, rather than the things that were really going to drive the business.

Is it possible to measure something as mercurial as customer delight? Fortunately, Fred Reichheld and his colleagues at Bain & Company worked for 25 years to figure out how to do that. And we now have a reliable body of expertise on how to do it. It's discussed in Fred's wonderful book, The Ultimate Question (HBSP, 2006).

In subsequent posts, I will explain in more detail how to go about measuring customer delight, including both at the overall organizational level and at the micro level of individual teams, so that everyone in the organization has a clear line of sight to the goal of the firm: is the customer being delighted?

A time is thus coming in the not-too-distant future when the main topic of discussion at the analysts’ phone-in with the chief financial officer will be less about rather than its fudged quarterly financial numbers and more about the firm’s audited statistics on client delight.